High Court Rules Equitable Defenses Don’t Override ERISA Plan Terms

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
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On April 16, 2013, the U.S. Supreme Court issued its decision in US Airways, Inc. v. McCutchen (No. 11–1285), deciding the issue of whether equitable defenses, such as the principle of unjust enrichment, can override the reimbursement provision of a health benefits plan established under the Employee Retirement Income Security Act (ERISA). Specifically at issue in the case was §502(a)(3) of ERISA, which authorizes health-plan administrators to bring a civil action to obtain appropriate equitable relief to enforce the terms of a plan. The Court held that such equitable defenses cannot override the clear terms of a plan.

The case arose from a dispute over a health benefit plan provision that required participants to reimburse the plan for medical expenses paid by the plan where the expenses were incurred as a result of the fault of a third party and the participant was able to obtain a recovery for those expenses from the third party. After a participant suffered injuries in a car accident, the plan paid medical expenses in the amount of $66,866. The participant then sued the driver and recovered $110,000 ($40,000 of which went to attorneys’ fees). The employer, as a fiduciary of the health plan, then sued the participant under §502(a)(3) seeking reimbursement from the tort recovery. In response, the employee asserted various equitable defenses to reduce the plan’s recovery and also argued that the plan was required to share in the attorneys’ fees and costs incurred in obtaining the tort recovery.

The case eventually reached the Third Circuit Court of Appeals, which ruled that in a §502(a)(3) suit, regardless of the terms of an ERISA plan, a court must apply any “equitable doctrines and defenses” that traditionally limited the relief requested. The Third Circuit held that “the principle of unjust enrichment,” for example, overrides a plan’s reimbursement clause if and when they come into conflict. The court also held that the plan was required to share in the participant’s attorneys’ fees and costs under the common fund doctrine.

The U.S. Supreme Court held that equitable defenses cannot override the clear terms of an ERISA plan. According to the Court, attempting to enforce the employer’s plan—“the modern-day equivalent of an ‘equitable lien by agreement’”—“means holding the parties to their mutual promises” and “declining to apply rules…at odds with the parties’ expressed commitments.” Because the health plan effectively disclaimed the application of unjust enrichment or other equitable defenses, the Court ruled that the participant could not rely on equitable defenses to defeat “the plan’s clear terms” and thereby reduce the plan’s recovery. However, the Court went on to find that the health plan was silent on the issue of whether it would share in the attorneys’ fees and costs incurred in obtaining the tort recovery. As a result, the common fund doctrine would therefore provide the default rule, requiring the plan to reduce its reimbursement recovery by a pro rata share of the fees and costs.

According to Mark E. Schmidtke, a shareholder in the Chicago office of Ogletree Deakins, “The McCutchen decision reinforces the importance of ERISA plan documents and the fact that plan terms override otherwise applicable equitable principles. It provides important guidance not only for those who litigate these types of cases, but also for those who draft the plans in the first place.”

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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